Income Tax Appellate Tribunal - Delhi
Torus Business Solutions Pvt. Ltd., New ... vs Dcit, New Delhi on 10 August, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-2', NEW DELHI
Before Sh. N. K. Saini, AM and Sh. Kul Bharat, JM
ITA No. 1974/Del/2015 : Asstt. Year : 2010-11
Torus Business Solutions Pvt. Vs DCIT,
Ltd., S-369, Greater Kailash-II, Circle-25(2),
New Delhi-110048 New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AADCT1441Q
ITA No. 6201/Del/2015 : Asstt. Year : 2011-12
DCIT, Vs Torus Business Solutions Pvt. Ltd.,
Circle-25(2), S-369, Greater Kailash-II,
New Delhi New Delhi-110048
(APPELLANT) (RESPONDENT)
PAN No. AADCT1441Q
CO No. 23/Del/2016 : Asstt. Year : 2011-12
Torus Business Solutions Pvt. Vs DCIT,
Ltd., S-369, Greater Kailash-II, Circle-25(2),
New Delhi-110048 New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AADCT1441Q
Assessee by : Sh. Ravi Sharma, Adv.
Revenue by : Smt. Binita Devi Neorem, Sr. DR
Date of Hearing : 08.08.2018 Date of Pronouncement : 10.08.2018
ORDER
Per N. K. Saini, AM:
The appeal by the assessee for the assessment year 2010-11 is directed against the order dated 29.12.2014 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act) while the appeal of the department and the Cross Objection of the assessee for 2 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
the assessment year 2011-12 are directed against the order dated 23.09.2015 passed by the AO u/s 143(3) r.w.s. 144C(4) of the Act.
2. At the first instance, we will deal with the appeal of the assessee in ITA 1974/Del/2015 for the assessment year 2010-11. Following grounds have been raised in this appeal:
"1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab-initio.
2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(3) of the Income Tax Act, 1961 ("Act").
3. That on facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. Dispute Resolution Panel ("DRP") erred in making an addition of INR. 9,914,264/- to the returned income of the Appellant by re-computing the arm's length price of the international transactions under section 92 of the Act by:
3.1 Not accepting the quantitative tillers selected by the Appellant in its transfer pricing documentation/fresh search and by instead applying additional quantitative filters which lacked valid and sufficient reasoning;
3.2 Rejecting companies selected by the Appellant in its transfer pricing documentation/fresh search even when such companies were functionally comparable to the Appellant;
3 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016Torus Business Solutions Pvt. Ltd.
3.3 Accepting companies which are functionally not comparable to the Appellant in terms of Functions, Assets and Risk profile;
3.4 Including companies, as comparables, with extraordinarily high or supernormal profit margins;
3.5 Including companies, as comparables, with very high turnover as compared to the Appellant;
3.6 Not providing the benefit of economic adjustment on account of differences in risk profile between the Appellant and the final comparable set, in arriving at the arm's length margin;
4. The Ld. AO/ Ld DRP/Ld. TPO erred in disregarding the multiple year data selected by the Appellant in the TP Documentation and in selecting the current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for financial year 2009-10 was not available within the public domain.
5. The Ld. AO/LD DRP/Ld. TPO erroneously computed the margins of some of the companies selected by him as comparables.
6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation.
7. That the Ld, AO erred in facts and in law in charging and computing interest under section 234B and 234D of the Act.
That the above grounds are independent and without prejudice to each other.
4 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016Torus Business Solutions Pvt. Ltd.
The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of objection either before or during the course of proceedings in the interest of the natural justice."
3. Ground Nos. 1 & 5 are general in nature. Ground Nos. 2 & 4 were not pressed while ground no. 6 is pre-maturely raised, so these grounds do not require any comments on our part.
4. Vide ground Nos. 3 to 3.6, the grievance of the assessee relates to the Transfer Pricing adjustment a mounting to Rs.99,14,264/- on account of arm's length price by rejecting the comparables selected by the assessee and introducing new comparables.
5. The facts of the case in brief are that the assessee was engaged in the business of knowledge process outsourcing and data processing service. Primarily it was engaged in rendering back office support services to Torus group. During the year under consideration, the assessee e-filed its return of inco me on 15.10.2010 declaring an income of Rs.1,36,30,121/-. The case was selected for scrutiny. Since, the assessee had entered into international transactions with its associated enterprises (AEs). The AO referred the matter to the Transfer Pricing Officer (TPO) to determine the arm's length price of the international transactions u/s 92CA(3) of the Act. The TPO noticed that the assessee had entered into following international transactions:
S.No. Type of int erna tional Method sel ect ed Total value of tran sactio n tran sactio n (Rs.)
1. Pro vi sion of ITES/BPO TNMM OP/T C 9,40,46,135 5 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
services
2. Reimbursement of TNMM OP/T C 1,29,63,118 expen ses paid
6. The TPO also noticed that the arm's length price of the international transactions representing IT enabled services provided to the AEs was determined by the assessee by applyin g transactional net margin method (TNMM) and the operating profit to total cost ratio (OP/OC) was taken as the profit level indicator (PLI) in the TNMM analysis. He also noticed that the PLI of the company was arrived at 17.36% on cost whereas the average PLI of the comparables was arrived at 14.13% as per the analysis in the TP documents and that the PLI of the co mparable companies had been worked out by adopting weighted averages for the current year and the immediately preceding periods. The assessee had selected the following comparables in its TP study report:
Sl. Name of the Comparable FY 09-10 FY 08-09 FY 07-08 Average No.
1. Aditya Birla Minacs Worldwide Ltd NA 21.43% -4.36% 8.76%
2. Cosmic Global Ltd NA 40.61% 23.30% 32.38%
3. Informed Technologies India Ltd NA 22.61% 3.63% 10.89%
4. Nittany Outsourcing Services Pvt. Ltd. NA NA 19.38% 19.38%
5. Datamatics Financial Services Ltd. NA -6.46% 0.55% -3.03%
6. Omega Healthcare Management Services NA 15.43% -0.73% 9.34% Pvt. Ltd.
7. Jeevan Softech Ltd. (BPO & ITES segment) NA 13.44% NA 13.44%
8. R System International Ltd 7.07% 14.08% 9.53% 10.43%
9. Caliber Point Business Solutions Ltd. 21.16% * * 21.16% (Segmental)
10. Ultramarine & Pigments Ltd -11.43% 24.59% 29.28% 13.28%
11. Firstobject Technologies Ltd. NA 5.22% 5.02% 5.15%
12. Sarawat Infotech Ltd. NA * * *
13. Crossdomain Solutions Pvt. Ltd. NA 29.40% 26.98% 28.32% Mean 14.13% 6 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
7. The TPO, however, selected his own 10 co mparables and worked out the average margin at 31.73% and proposed the adjust ment of Rs.1,15,16,983/- by observing as under:
"9. This office has examined the search process of the assessee. The description of the filters to be used and the justification to apply them is given below. An analysis of companies in the accept/reject matrix has also been done with respect to the nature of function/operations, as also w.r.t the filters applied.
i. Use of current year data: As discussed above in Para 9.
ii. Different financial year:- If a comparable is having an accounting year different from financial year for the taxpayer for which financial are being considered, the same has been excluded as the profits and revenue pertain to different period other than current year which is FY 2009-10. This filter is being applied because even after application of this filter, there are several comparable companies available in the domain.
iii. Reject companies where turnover is less than Rs.5 Crore: As discussed above.
iv. Select companies where the ratio of service Income to total Income is at least 75 %: As discussed above.
v. Select companies where income from exports Is at least 75 % of total Income: This filter is required to be applied since the taxpayer is primarily earning income from exports, as already discussed supra. Even in cases where an assessee is having income from domestic operations, the transfer pricing audit will only benchmark transactions with the AE, which are mainly export transactions. There 7 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
are judicial pronouncements that support the case that exporters should not be compared with domestic companies. Hence, this filter is required to be applied with a threshold of 75%.
vi. Reject companies where related party transactions exceed 25 % of sales: There is no doubt that companies with significant related party transactions need to be excluded from the benchmarking process. On the issue of threshold of related party transactions, it can be stated that when the RPT exceeds 25 % of sales, it can be said to be the stage when it will start affecting the price paid/received. Companies below 25% RPT transact business substantially with unrelated party and the prices can be construed to be market determined. The rationale given for the use of the limit of 25 % is sound and this threshold limit has been approved explicitly an implicitly in quite a few judicial pronouncements.
vii. Companies that have employee cost that is less than 25 % of total cost: The rationale for this filter is that companies that are engaged in IT enabled services will require a minimum level of expenditure on personnel expense. There are judicial pronouncements that support the contention that expense on personnel that is extremely low may lead to the conclusion that the company is not engaged in IT enabled services. Services are rendered through employees. The expenditure incurred on purchase of raw material, trading goods etc. is negligible in such cases. Employees cost constitutes the major component of cost in any service sector.Very low employee cost, viz., less than 25 % of total cost, indicates that company is either engaged in some other business or it has outsourced the service functions to a third party, i.e., it is not rendering services on its own.
8 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016Torus Business Solutions Pvt. Ltd.
Such companies cannot be treated as functionally comparable to the assessee.
viii. Companies that are affected by some peculiar economic circumstances: Companies that are affected by factors like persistent losses, declining sales, extraordinary income or expense, mergers and acquisitions or other such factors which affect the operations of the company substantially should not be used as comparables as they will not prove to be good benchmarks.
10. Based on the remarks above, the comparables used by you while giving the updated margins, are discussed w.r.t. the acceptance or rejection of these comparables.
Sl. No. Name of the Remarks
compa rable
1. Aditya Birla Minacs This compan y i s ha ving
Wo rld wi de Ltd. signif icant RPT (3 3.53%)
and it al so f ails the exp ort
sales f ilter (71.57%).
Hence, no t a suit able
compa rable.
2. Cosmic Globa l Ltd. This is a suit able
compa rable.
3. Inf ormed This compan y i s ha ving
Technolo gies India sales belo w Rs. 5 Cro res.
Ltd. Hence, no t a suit able
compa rable.
4. Nittany Outsourcing This is a suit able
Services Pvt. Ltd. compa rable.
5. Datamati cs This compan y f ails service
Finan cial S ervices income f ilter (55.23%).
Ltd. Hence, no t a suit able
compa rable.
6. Omega Healt hca re Compl ete f inancial s of the
Management compan y a ren't a vailabl e on
Services Pvt. Ltd. the public domain. Hence,
not a suitable compa rabl e.
7. Jeevan Sof tech Ltd. This compan y i s ha ving
sales belo w R s. 5 cro res.
Hence, no t a suit able
9 ITA Nos.1974 & 6201/Del/2015
CO No. 23/Del/2016
Torus Business Solutions Pvt. Ltd.
compa rable.
8. R System This compan y i s ha ving
Internati onal Ltd. f inancial yea r endin g oth er
than March. Hen ce, not a
suitabl e compa rabl e.
9. Caliber Point This compan y i s ha ving
Business Solution s f inancial yea r endin g oth er
Ltd. (Segmental) than March. Hen ce, not a
suitabl e compa rabl e.
10. Ultramarin e & This compan y i s ha ving
Pigments Ltd. signif icant RPT in resp ect of
provi ding of IT Enables
Services. Hence, not a
suitabl e compa rabl e.
11. First Obj ect Employee cost i s less than
Technolo gies Ltd. 25% of total cost
12. Sara swat Inf otech Fail s expo rt f ilter.
13. Cro ssdomai n Current ly da ta is not
Solution s Pvt. Ltd. availabl e
11. Accordingly, the following comparables are proposed to be taken in your case for benchmarking the international transactions based on your functional profile:
S. No. Company Name OP/OC (%)
1. Accentia Technologies Ltd. 43.07
2. Cosmic Global Ltd. 18.28
3. E4e Healthcare 31.03
4. Fortune Infotech Ltd. 22.80
5. I-gate Global Ltd. 24.54
6. Infosys BPO Ltd. 31.46
7. Jindal Intellicom Ltd. 13.62
8. Omega Healthcare 15.31
9. TCS E-serve International Ltd. 53.80
10. TCS E-Serve Ltd. 63.38
Average 31.73
And proposed the adjust ment of Rs.1,15,16,983/-.
10 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016Torus Business Solutions Pvt. Ltd.
8. Thereafter, the AO passed the draft assessment order dated 20.02.2014 and proposed the aforesaid adjust ment. Against the said draft assessment order, the assessee raised objection before the ld. DRP and challenged the inclusion of the comparables selected by the TPO. The assessee also pointed out certain computational errors of the computation of the margins of M/s Cosmic Global Ltd. and M/s e4e Healthcare Services Pvt. Ltd. The assessee also sought fo r the working capital adjust ment.
9. The ld. DRP rejected the objection raised by the assessee for exclusion of the co mparables selected by the DRP, however, accepted the contention with regard to the adjustment on account of working capital. On the direction of the ld. DRP, the AO made the addition of Rs.99,14,264/- on account of adjust ment to the arm's length price after correcting the margin of comparable companies M/s Cosmic Global Ltd. & M/s e4e Healthcare Services Pvt. Ltd. and working capital adjust ment.
10. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the following co mparables need to be excluded on account of functional dissimilarity:
"i. TCSE-Serve International Ltd.
ii. TCS E-Serve Ltd.
iii. Infosys BPO Ltd.
iv. Accentia Technologies Ltd.
v. e4e Healthcare Business Services Ltd."
It was further sub mitted that segmental information were not available in respect of M/s TCSE-Serve International Ltd., M/s TCS 11 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
E-Serve Ltd. & M/s Accentia Technologies Ltd. and that M/s Infosys BPO Ltd. acquired M/s McCamish Syste ms LLC while in M/s Accentia Technologies Ltd. amalgamation of M/s Ascent took place. It was further sub mitted that M/s TCSE-Serve Internationa l Ltd. and M/s TCS E-Serve Ltd. were also having the intangibles and also made payment for TATA brand equity, therefore, the aforesaid five co mparables need to be excluded. It was also submitted that this Bench of the Tribunal has rejected the first four comparables while deciding the appeal in ITA No. 12.02/Del/2015 for the assessment year 2010-11 in the case of Equant Solutions India Pvt. Ltd. Vs DCIT vide order dated 21.01.2016 (copy o f which is placed at page nos. 114 to 144 of the assessee's compilation). It was further submitted that the said order was followed in the case of O mnigloble Information Technologies Pvt. Ltd. Vs ACIT, Circle-6(1), New Delhi reported at (2016) 74 Taxmann.com 25 (Del.) (copy of which is placed at page nos. 167 to 179 of the assessee's paper book). It was further sub mitted that the comparables M/s e4e Healthcare Business Services Ltd. has been directed to be excluded by the ITAT Delhi Bench 'I-2', New Delhi in ITA No. 1478/Del/2015 for the assessment year 2010-11 in the case of Bechtel India Pvt. Ltd. Vs DCIT vide order dated 21.12.2015 (copy of which is placed at page nos. 74 to 94 of the assessee's compilation). It was further submitted that in the subsequent years i.e. assessment year 2011-12, the ld. DRP has directed to exclude the aforesaid comparables. Therefore, the ld.
12 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016Torus Business Solutions Pvt. Ltd.
DRP was not justified in rejecting the contention of the assessee and confirming the action of the TPO.
11. In his rival sub missions, the ld. Sr. DR supported the orders of the authorities below and further sub mitted that while applying the TNMM method a broader view has to be taken and that the assessee is doing pick & choose because the assessee in one yea r has choosen the comparable while in the another year the sa me comparable has been excluded.
12. We have considered the sub missions of both the parties and carefully gone through the material available on the record. It is noticed that in the case of M/s Omnigloble Informatio n Technologies Pvt. Ltd. Vs ACIT, Circle-6(1), New Delhi (supra) where one of us (Accountant Member) is the author this bench o f the ITAT has directed to exclude first three comparables i.e. M/s TCSE-Serve International Ltd., TCS E-Serve Ltd. and Infosys BPO Ltd. and the relevant findings have been given in para 26 whic h read as under:
"26. We have considered the submissions of both the parties and perused the material available on the record. As regards to the issue relating to exclusion of Infosys BPO Ltd., TCS E-Serve International Ltd. and TCS E-Serve Ltd. is concerned, it is noticed that this issue has been decided by the ITAT Delhi Bench 'I', New Delhi in the case of Equant Solutions India Pvt. Ltd. Vs DCIT in ITA No. 1202/Del/2015 for the assessment year 2010-11 (supra) and the relevant findings have been given in paras 22 to 24 of the order dated 21.01.2016 which read as under:
"22. Infosys BPO Limited 13 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
a. The assessee further objected to inclusion of Infosys BPO Ltd as comparable which has a margin at 31.44 %. Before the TPO assessee submitted that, this is the company, which has very high turnover and has huge brand value. Submission of the assessee that higher profits is because of highly established brand in the market place. TPO rejected the contention of the assessee holding that the assessee has failed to establish how the brand has influenced increased profitability of the comparable. The ld DRP also rejected the contention of the assessee. Before us, the assessee submitted that comparable is engaged in high- end integrated services in improving the competitive position of their clients and manage their business process and providing value added services to them. Further, the Infosys also carrying huge brand value and therefore this comparable should not be taken.
b. Ld DR Relied on the orders of lower authorities and stated that all the reasons have been considered by the TPO and DRP for inclusion of this comparable.
c. We have considered the rival contention regarding exclusion of Infosys BPO Ltd. It is engaged in high and integrated services and therefore it is functionally dissimilar. The Infosys brand is indisputably is a huge brand and definitely, result of that brand goes to this comparable. Therefore, the brand of Infosys definitely results in opening higher profits to this company. In view of the following decisions, the same is required to be excluded and hence it is ordered accordingly.
23. TCS E Serve International Ltd, a. This comparable was taken by TPO where the margin is 54.02 %. The TPO has taken this comparable considered this a company in IPS industry and considered it as a singled segment. The TPO was also of the vie w that there are no exceptional circumstances, which is related in the increase in the 14 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
profit. Before DRP the argument of the assessee were rejected and it was held that far profile of the company is similar to that of the appellant. Before us it was submitted that in addition to BPO services this company is engaged in providing technical services like software testing, verification and validation of the software which falls under software development services activity, which also includes transaction processing, technical services, therefore it is functionally dissimilar. Further it was also contended that there is no segmental data ITES and software development activity of the company is available and this comparable owns substantial amount of intangibles in the form of software licenses and it owns Tata Brand in which company is making payment. It was further submitted that the company has volatile margin over the year and its profitability has gone up 173 % on account of increased in infrastructure and therefore this comparable should be excluded.
b. Ld. DR relied on the orders of lower authorities and supported them.
c. We have considered the rival contention regarding the exclusion of TCS E-service International Ltd. the comparable is engaged in the business of BPO service and provides high-end technology services such as software testing, verification and validation of the software. Therefore, it is functionally dissimilar to the assessee. Further annual report of the company does not provide any segmental information related to ITES as well as software development services. The company also owns intangible of substantial amount and is benefitted usually by the Tata Brand. The company is also making appellant for use of such brand. Therefore this aspect also makes this comparable as inappropriate and therefore we order to exclude this comparable.
24. TCS E Serve Limited 15 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
a. TPO included this comparable, which has a margin of 63.42 %. The ld. DRP has also held that the far profile of the company is similar. Before us, ld. AR submitted that the company is dissimilar functionally. In addition to BPO services, it is also engaged in technical services such as software testing, verification and validation. It has also developed software such as transport management software. It does not have segmental reporting too. It was further submitted that the company owns substantial intangible assets in form of software licenses and it makes a payment for Tata Brand and therefore it gets the benefit use brand value of Tata.
b. Ld. DR relied on the orders of lower authorities and submitted that all the above reasons for selection of this comparable has been considered by the TPO.
c. We have also considered the rival contention for exclusion of TCS e-service Ltd. It is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and use of 'Tata' Brand, which has definitely benefited this comparable, it is directed to be excluded."
13. Since, the facts in assessee's case are similar to the facts involved in the case of O mniglobe Information Technologies Pvt. Ltd. Vs ACIT (supra). So, respectfully following the said order dated 07.09.2016, we direct the AO to exclude the aforesaid comparable while working out the arm's length price.
16 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016Torus Business Solutions Pvt. Ltd.
14. As regards to M/s Accentia Technologies Ltd. and M/s e4e Healthcare Business Services Ltd., it is noticed that these comparables are directed to be excluded by the ITAT Delhi Benc h 'I-2', New Delhi in the case of M/s Bechtel India Pvt. Ltd. Vs DCIT (Supra) and the relevant findings have been given at page nos. 89 & 90 which read as under:
"2) Accentia Technologies Limited This company has been included by the ld.TPO as a comparable. Functionally, Accentia Technologies Ltd., is into development of software products for healthcare.
It is submitted by the ld.AR that Accentia Technologies Ltd is also engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DTO), high end software services. It is also submitted by the ld.AR that segmental information in respect of this company is not available. It has been further brought to our notice that this company has been rejected by the Ld.TPO in the earlier year. The company has also had business restructuring during the year under consideration thereby giving rise to extraordinary circumstances. For all these reasons we direct the Assessing Officer to exclude this company as a comparable.
3) E4e Healthcare Business Services Private Limited This company has been included by the ld.TPO as a comparable. Functionally the company is into health care outsourcing services and in addition it also renders software development services. It is also observed that segmental information in respect of this company is not available. The company is also a 100 % EOU, under ST PI guidelines. We are therefore inclined to accept the contention of the assessee that this company should be excluded as a comparable. Hence we direct the Assessing Officer to do so."
17 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016Torus Business Solutions Pvt. Ltd.
15. Since, the facts in assessee's case are similar to the facts of the aforesaid referred to case of M/s Bechtel India Pvt. Ltd. Vs DCIT (supra). So, respectfully following the aforesaid referred to order dated 21.04.2015 of the Co-ordinate Bench, these two comparables are also directed to be excluded.
16. As regards to Ground No. 7, it was the common contention of both the parties that charging and computing of interest u/s 234B and 234D of the Act is consequential in nature. We order accordingly.
17. In departmental appeal for the assessment year 2011-12 i.e. in ITA No. 6201/Del/2015, following grounds have been raised:
"1. "On the facts and in the circumstances of the case, the DRP- II erred in directing to reduce the addition of Rs.1,52,88,220/- on account of proposed addition of arm's length price of the international transaction with its associated enterprises."
2. "On the facts and in the circumstances of the case, the DRP-II erred in directing TPO to exclude 5 mentioned below companies from the final set of comparables :
i) Acropetal Technologies Ltd.
ii) e-Clerx Services Ltd.
iii) ICRA Techno Analytics Ltd.
iv) Infosys BPO Ltd.
v) TCS E-Serve Ltd."
3. "The appellant craves, leave for reserving the right to amend, modify, alter, add or forego any ground (s) of appeal at any time before or during the hearing of appeal."
18. From the aforesaid grounds, it is noticed that the grievance o f the depart ment relates to the direction of the ld. DRP to exclude the five co mparables. Out of those five comparables, M/s Infosys BPO Ltd. and TCS E-Serve Ltd. were also directed to be excluded while 18 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
deciding the assessee's appeal for the assessment year 2010-11 in ITA No. 1974/Del/2015. Therefore, our finding given therein shall apply mutatis mutandis.
19. As regards to the re maining three comparables, the facts in brief are that the assessee while working out the arm's length price of international transactions representing IT enabled services provided to the AEs applied TNMM method and had taken OP/TC ratio as PLI. The assessee worked out its PLI at 17.30% on cost whereas the average PLI of comparables was worked out at 14.28 % as under:
No. Company Name FY 2010-11 FY 2009-10 FY 2008-09 Average OP/OC (%)
1. Aditya Birla Minacs Worldwide Ltd. NA NC 7.15 7. IS (segmental)
2. Caliber Point Business Solutions Ltd. 11.04 21.16 NC 15.80
3. Cosmic Global Ltd. 8.06 14.97 40.68 20.87
4. Fortune Infotech Limited NC 22.80 NC 22.80
5. Informed Technologies India Ltd. 9.59 26.15 22.61 19.68
6. Jindal Intellicom Limited NA 13.92 -1.00 8.97
7. Omega Healthcare NA NA 15.43 15.43 Management Services Pvt. Ltd.
8. R Systems International Ltd. -6.61 NC 14.08 4.37
9. Firstobject Technologies Ltd. NA 21.65 5.27 13.46 Mean 14.28
20. The TPO, however, selected the following nine comparables with average PLI at 25.54%:
S. NO. Name of the Company OP/TC(%)
1. Accentia Technologies Ltd. 29.18
2. Acropetal technologies Limited(Seg) 14.36
3. e4e Healthcare Business Services 9.77
Pvt. Ltd.
19 ITA Nos.1974 & 6201/Del/2015
CO No. 23/Del/2016
Torus Business Solutions Pvt. Ltd.
4. Eclerx Services Ltd. 56.82
5. ICRA Techno Analytics Limited 25.24
6. Infosys BPO Ltd. 17.86
7. Jindal Inteilicom Ltd. 13.70
8. Microgenetic Systems Ltd. -3.20
9. T C S E-Serve Ltd. 69.31
Mean 25.89
21. The TPO proposed the adjust ment of Rs.1,52,88,220/-.
Thereafter, the AO passed the draft assessment order and proposed the aforesaid adjustment. Against the said draft order passed by the AO, the assessee raised the objection before the ld. DRP who directed to exclude the co mparables by observing as under:
"I. Accentia Technologies Ltd., Acropetal Technologies Ltd. & Eclerx Services Ltd., ICRA Techno Analytics Ltd.:
There are functional variations wrt Acropetal Technologies Ltd. & Eclerx Services Ltd., ICRA Techno Analytics Ltd. as the assessee is into low end, back end support whereas the comparable is in to KPO business and engaged into development and sale of products. Hence these are to be excluded. Accentia Technologies Ltd. was accepted in last DRP order. In order to maintain consistency, this comparable shall be retained.
II. Infosys BPO Ltd. & TCS E-Serve Ltd.:
These are mega Companies and require to be excluded as discussed in earlier paras."
22. Now the depart ment is in appeal. The ld. Sr. DR strongly supported the order of the TPO/AO while the ld. Counsel for the assessee sub mitted that the ld. DRP was fully justified in directing the AO to exclude the comparables on account of functiona l 20 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
dissimilarity. It was further sub mitted that M/s Eclerx Services Ltd. and M/s ICRA Techno Analytics Ltd., TCS E-Serve Ltd. were directed to be excluded by the Hon'ble Delhi High court in the case of Pr. CIT Vs B. C. Management Services (P.) Ltd. (2018) 403 ITR 45 (copy of which is placed at page nos. 23 to 34 of the assessee's paper book). It was further submitted that M/s Acropeta l Technologies Ltd. is also functionally different and directed to be excluded by the ITAT Delhi Bench 'I-2', New Delhi in the case o f Cadence Design Systems (I) (P.) Ltd. Vs ACIT, Circel-5(2), New Delhi in ITA No. 6315/Del/2015 for the assessment year 2011-12 vide order dated 02.04.2018 reported at (2018) 93 Taxmann.co m 227 (Del.).
23. After considering the submissions of both the parties and the material on record, it is noticed that the Hon'ble High Court in the case of Pr. CIT Vs B. C. Management Services (P.) Ltd. (2018) 403 ITR 45 (supra) held as under:
"10. So far as question no. 1 with respect to exclusion of four comparables is concerned, we notice that E-clerx was excluded on two grounds i.e. no segmental data was available, and it was functionally different as it was providing high end/BPO services.
11. This Court further notes that E-clerx is to provide financial services such as consultancy business solution and testing.
12. The Assessee provides IT enabled services in infrastructure development and testing, system and performance operations management and support etc. The ITAT excluded E-clerx as comparable after noticing 21 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016 Torus Business Solutions Pvt. Ltd.
that it provided high value financial services relating to consultancy business and solution testing besides the web content management merchandising execution, web analytics, etc. This functional dissimilarity, and absence of segmental data led to its exclusion as a comparable. Those are findings of facts based upon record. Consequently, exclusion of E-Clerx was in order and cannot be interfered with.
13. The exclusion of second comparable ICRA Techno Analytics Ltd. was on the basis that it had engaged itself in processing and providing software development and consultancy and engineering services/web development services. The reasons for execution were functional dis- similarities and that segmental data were unavailable. Again the findings of the ITAT are reasonable and based on record. The third comparable that the AO/TPO excluded is TCS E-serve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value; that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld. The assessee was aggrieved by the inclusion of Accentia a Software Development Company. The Revenue is aggrieved by the exclusion of Accentia from the TP analysis. The DRP had directed its deletion. We observe that the ITAT has noticed the unavailability of the segmental data so far as these comparables are concerned. Furthermore, the functionality of this entity was concerned, it is different from that of the assessee; Accentia was engaged in KPO services in the healthcare sector."22 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016
Torus Business Solutions Pvt. Ltd.
24. We, therefore, by respectfully following the aforesaid referred to order, are of the view that the ld. DRP was fully justified in directing to exclude Eclerx Services Ltd. and ICRA Techno Analytics Ltd. also from the list of the comparables.
25. As regards to the exclusion of M/s Acropetal Technologies Ltd. is concerned, it is noticed that the ITAT Bench 'I-2', New Delhi in the case of Cadence Design Syste ms (I) (P.) Ltd. Vs ACIT, Circle-5(2), New Delhi (supra) held as under:
"25. Assessee objected this company to be in the list of comparables mainly on the ground that this company employees cost is less than 25% of the total cost and also that this company is engaged in significant R &D activities and incurring significant advertisement, marketing and promotion expenses as a percentage of sale. Learned TPO observed that there appears to be merely a difference in classification of expenses in the annual report for FY 2010-11, and if we look at figures for the FY 2011-12 in the annual report, the expenses on salary and wages are correctly classified, and, as such, this is a good comparable as it has also engaged in offshore model of work as that of the assessee.
26. Ld. DRP held that this company is in software development, passed the employee cost filter, there is no evidence of increase in margin profit on account of creation of incubation business unit, as per website the company started as engineering design services and expanded its foray of services to add software service capabilities and as per page 53 of annual report, segment wise breakup of the revenue is also available. For these reasons, ld. DRP recorded that it is a good comparable.
27. Ld. AR brought to our notice that the salaries and consultancy charges including bonus incurred by Acropetal was Rs. 13.51 crores whereas the technical sub contract expense was Rs. 55.77 crores which accounts for only 13.74% and accordingly it does not pass through the filter proposed by the ld. TPO.23 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016
Torus Business Solutions Pvt. Ltd.
28. Ld. DR justified the orders of the authorities below basing on the observations of the ld. TPO and considered by the learned DRP to the effect that it is only a matter of difference in classification of expense and the financials of subsequent years ratify the same
29. Per contra, ld. AR submitted that when the matter relates to the FY 2010- 11 and the annual report is available in the public domain, the audited reports of this year are to be considered but not the financials of the next year.
30. On a perusal of page No.45 & 46 of the annual report of Acropetal, we find that the submission of the ld. AR is justified. We, therefore, direct the ld. AO to verify the employee cost percentage to the total cost and if it does not pass the filter, to exclude the same."
26. Since, the facts for the assessee's case are similar to the facts in the aforesaid referred to case of M/s Cadence Design Syste ms (I) (P) Ltd. Vs ACIT. So, respectfully following the aforesaid referred to order, we direct the AO to decide as has been directed by the ITAT in the above said case.
27. As regards to the Cross Objection filed by the assessee in CO No. 23/Del/2016, the ld. Counsel for the assessee submitted that it is to be considered as academic in nature in case the departmenta l appeal is dismissed. Since, we have decided the appeal of the department in former part of this order and it has been held that four out of five co mparables were rightly excluded by the ld. DRP and one of the comparable is directed to be excluded after verification. Therefore, the Cross Objection filed by the assessee is considered as acade mic in nature and hence dismissed.
24 ITA Nos.1974 & 6201/Del/2015 CO No. 23/Del/2016Torus Business Solutions Pvt. Ltd.
28. In the result, the appeal of the assessee for the assessment year 2010-11 is allowed and departmental appeal for the assessment year 2011-12 is partly allowed for statistical purposes while the Cross Objection filed by the assessee is dismissed.
(Order Pronounced in the Court on 10/08/2018) Sd/- Sd/-
(Kul Bharat) (N. K. Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 10/08/2018
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR